Occasionally, I’ll see a set of books where the business owner invoices a client and needs to charge them sales tax. They send an invoice (to be paid in future) or post a sales receipt (if customer has paid already) in QuickBooks. One line will be for the product or service sold, and they’ll enter a second line with the sales tax that they have calculated. Often, that sales tax is improperly mapped to “sales of product income” or “sales tax expense”, making the business vulnerable to forgetting to remit their sales tax to the state. And that can open a very unpleasant can of worms.
There is a better way! QBO is all set up to calculate sales tax automatically, remind you when to pay it and keep track of much you need to pay. This keeps you in the good graces of the state tax board, which is always a good place to be.
Here’s the thing. Sales tax does not belong to you, so it should never be posted to an income account – such as sales of product income. Nor is it an expense, as it did not come out of the business’s pocket. You are simply collecting from the customer and passing it along to the state. For the business owner, it is a liability (like a debt or loan).
Below is a description of how to set up sales tax in your QBO account. It pretty much follows the QBO help videos, but for those who prefer to follow a set of printed steps, this can be printed out and kept as a reference guide.